USD/CAD sinks after BoC rate hike
The announcement of the BoC's first rate hike post-pandemic has knocked the USD/CAD exchange rate upside down. However, some analysts consider the Canadian dollar too expensive.
The US dollar fell to around 1.2587 against the Canadian dollar in today's trading (3/March), although it tends to strengthen against some other major currencies. The announcement of the BoC's first post-pandemic rate hike and the fantastic rise in oil prices have boosted the Loonie's exchange rate. However, some analysts think the Canadian dollar is now too expensive.
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| USD/CAD Daily chart via TradingView |
In Wednesday's policy meeting, the Board of Governors of the Bank of Canada (BoC) decided to raise the benchmark interest rate from 0.25% to 0.50%. The BoC also warned that Russia's invasion of Ukraine would contribute to increasing inflation and worsening the global economic outlook. At the same time, they provide little clarity about future policies.
The BoC says “rates will need to hike further”, but hasn't even started Quantitative Tightening (QT) yet. The latest BoC statement said that it would continue the reinvestment phase of the Quantitative Easing program which was launched during the pandemic. In addition, they did not reveal any new projections or clues that suggest a more hawkish bias.
This has made some analysts somewhat pessimistic about the prospect of a further BoC rate hike in the medium term.
"With the CPI likely to increase higher than our expectations during the first half of the year, it is likely the central bank will announce the remaining three-quarter point rate hike we expect for 2022 over the next three (post-policy meeting) announcements, rather than breaking it down gradually through the end of the year. We expect the (BoC) to then pause at 1.25% overnight to consider the direction of growth and inflation," said Avery Shenfeld, chief economist at CIBC Capital Markets.
"While the prospect of further (rate) hikes will support the CAD in some cross pairs, we don't expect much follow-through in the short term. Most of the good news has been factored in, and the CAD now shows up as one of the most overbought currencies on our dashboard globally. As such, we have been profiting from short GBP/CAD," said Mark McCormick, global head of FX strategy at TD Securities.
Jay-Zhou Murray of MONEX Canada expects the BoC to start its balance sheet (QT) trimming in April. BoC Governor Tiff Macklem is likely to provide this lattice in his speech today.
The next Canadian dollar exchange rate movement is likely to continue to be influenced by speculation around interest rates and QT. Apart from that, there is also the potential impact of fluctuations in global crude oil prices and developments in the impact of the Russia-Ukraine war.
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